· A huge increase in volatility saw the VIX net speculative positioning surging
· Bond traders increased their net short position despite a healthy fall in yields
· US 10Y Treasury price (TNOTE ) managed to stay below a crucial short-term resistance
The last week saw a gargantuan surge in both realized and implied volatility which in turn sent equities lower, however, other markets such as currencies or bonds turned out to be much less volatile during the whole week. Putting all of that together one may draw conclusions that the latest sell-off could have been just a short-lived one as it did not spill over elsewhere. After all, it’s worth taking a closer look at the weekly CFTC report released on Friday which seems to offer a notable clue with regard to bond traders’ behavior.
Bond traders decided to increase their net short position in the week ended on Tuesday (6th).
On the face of it, each slump in yields ought to spur increased demand for bonds if bond traders believe the long-term trend will stay turned to the upside, albeit it was not the case last week. Do notice that despite a rapid drop in the US10Y yield which took place a week ago (from 2.88% to below 2.65%), bond traders chose to increase their net short position to the highest since the beginning of the past year. It illustrates that the bear market should prevail going forward. On the flip side, one cannot miss an abrupt rebound in the 10Y yield which morphed into a steady increase thereafter. As a result, we have already trimmed all losses made recently as the 10Y yield is trading at 2.88% at the time of writing.
The net long speculative positioning surged the highest on record last week.
Along with the bond market, the VIX or the fear index seems to deserve attention as well. This market saw the largest increase in positioning since the CFTC began compiling the data. While it could not bode well for stocks as higher volatility tends to daunt equity investors one cannot forget the outstanding increase in the VIX was undermined by short-covering coming from some ETN funds betting on lower volatility. So, while the VIX was slipping everything was right, however, things went wrong after a massive surge in volatility forced some ETN funds to go bankrupt. Anyway, the bottom line is that bond traders stick to their stance that yields ought to creeping up in the future being a burden for stocks all around the world. Nonetheless, taking account of the current positioning one may count on a possible short-lived reversal in yields which would appease stock investors.
TNOTE managed to stay below a short-term resistance placed at 122.6 (pay attention to the long shadow seen in the weekly candlestick) boding well for yields to continue rising. The nearest supports might be found at subsequent retracements stemming from the long-term rally begun in June 2007.